Tuesday, December 14, 2010

Newcastle United's Finances In Black And White

Just when Newcastle United fans could be forgiven for thinking that their club had abandoned its frequent attempts to act as the setting for one of football’s longest running soap operas, their rotund owner Mike Ashley struck again, sacking the likeable Chris Hughton, who had guided the team to promotion last season on a shoestring budget, and replacing him with Alan Pardew, a man whose track record provides little support for his boundless confidence. In their first season back in the Premier League, Newcastle were handily placed in mid-table, having demolished local rivals Sunderland 5-1 and securing away victories against the likes of Arsenal and Everton, not to mention an impressive win at Chelsea in the Carling Cup.

For some inexplicable reason, Ashley suddenly decided that Newcastle needed a manager “with more experience”, even though more rational observers might point out that Hughton had obviously acquired more experience than when Ashley settled on him as permanent manager at the beginning of last season. As the local paper, the Evening Chronicle, wrote, “To say the appointment of Alan Pardew is bewildering and perplexing to Newcastle United fans is an understatement.”

Of course, Ashley is no stranger to putting his foot in it and on occasions it has felt like he is on a one man campaign to demonstrate that the Premier League’s fit and proper person test is equally useless for English owners as those arriving from foreign shores. Since June 2007, when Ashley bought the club, his tenure has been an almost textbook example of how to alienate supporters with a series of embarrassing episodes being gleefully reported across the media.

"No, thank you, Chris"

The signs were far from promising right off the bat, as Ashley’s purchase bore all the hallmarks of an impulse buy, when he failed to perform the standard due diligence on the club’s books. In fairness, he might have felt that he had to move quickly, but businessmen who fail to look before they leap often end up in a dangerous place. Caveat emptor. He then compounded this error by bringing in the “Cockney mafia”, but their origins weren’t the real issue, rather this was a management team that possessed virtually no experience of running a football club.

Although chairman Chris Mort was popular with fans, his replacement Derek Llambias was previously director of three London casinos, while Tony Jimenez, briefly appointed vice-president responsible for player recruitment, was a director of a small sports agency. To add insult to injury, the man with the most inappropriate surname in football, Dennis Wise, was then recruited as Executive Director of Football. This is the man famously described by Sir Alex Ferguson as a man capable of starting a fight in an empty room, though he’s also proved to be pretty tasty outdoors, as evidenced by his conviction for assaulting a taxi driver.

Wise’s appointment undermined the then manager Kevin Keegan, most obviously with the signings of players such as Xisco and Ignacio Gonzalez, which “King Kev” had not approved. This led to Keegan’s acrimonious departure and a legal case in which the club’s explanation of the circumstances behind his exit was described by the tribunal as “profoundly unsatisfactory.”

"You don't know what you're doing"

Then there was the ill advised plan to sell off the naming rights to St James’ Park, which was guaranteed to upset the Toon Army. As was the brilliant idea to put the club up for sale on its website, when bidders were invited to send applications to an e-mail address, which was only a small step away from those humorous eBay auctions of any football club languishing in the doldrums. In fact, Ashley has tried to sell Newcastle United twice, only to withdraw the club from the market on each occasion. Potential purchasers were presumably put off by the tagline, “One careless owner.”

Of course, the lowest grade on Ashley’s report card must be reserved for over-seeing relegation from the Premier League after 16 seasons in the top flight, when the club enjoyed one of the highest budgets in the league. This was hardly surprising after a series of frankly baffling managerial appointments, starting with the overly sentimental choice of Keegan, followed by Joe Kinnear, who had been out of the game for four years, and culminating in local hero, Alan Shearer, who arrived straight from the Match of the Day sofa confident of keeping the club up, but proceeded to win only once in his eight matches in charge.

This managerial merry-go-round was all the more surprising, as Ashley had pinpointed this as one of the factors behind Newcastle’s perilous state when he arrived, “One of the reasons that the club was so in debt when I took over was due to transfer dealings caused by managers moving in and out of the club. Every time there was a change in manager millions would be spent on new players and millions would be lost as players were sold. It can't keep on working like that. It is just madness.”

"Welcome to the madness"

Maybe that way of thinking explains Ashley’s apparently crazy decision to go “all in”, rather than hedging his bets, by handing Pardew a five-year contract, which is surely the longest in the Premier League. Certainly, Pardew was singing from the same song sheet as his new boss during his first press conference, “I intend to focus on developing exciting young players through the club’s excellent academy and development squad, and I know the board here at St James’ Park is very committed to that too.” They sure are, having drawn up a five-year plan with the objective of breaking-even by the 2015/16 season.

Part of this strategy is for the club to “buy clever”, rather than rely on expensive signings. Ashley outlined his vision a couple of years ago, “My plan and my strategy for Newcastle is different. It has to be. Arsenal is the shining example in England of a sustainable business model. It takes time. It can't be done overnight. Newcastle has therefore set up an extensive scouting system. We look for young players, for players in foreign leagues who everyone does not know about. We try and stay ahead of the competition. We search high and low looking for value, for potential that we can bring on and for players who will allow Newcastle to compete at the very highest level, but who don't cost the earth.”

This approach is evidenced by the purchases made in this summer’s transfer window, when Hughton had to largely make do with a series of free transfers and loans, as the club could not afford to spend big money on new players. Dan Gosling and Sol Campbell arrived on free transfers from Everton and Arsenal respectively, while James Perch cost only £1 million from Nottingham Forest. However, Newcastle’s frugal policy can still work, the best example perhaps being the impressive midfielder Cheick Tiote, who cost just £3.5 million from Twente Enschede, while the loan signing of the skilful winger Hatem Ben Arfa from Marseille was looking inspired before his unfortunate injury.

Joe McLean, partner at accountants Grant Thornton, praised the new strategy, “It’s eminently sensible. It’s not a message that supporters want to hear, but I think it’s a sensible statement if you’re concerned about the long-term future of Newcastle United.” Indeed, the fans appear to be taking a much more realistic stance these days, understanding that the club faces some difficult financial challenges.

These are evident when you look at the club’s accounts, where they have reported large losses for the last four years. The last time Newcastle made a profit was back in 2005 – and that was a very small one of £620,000. Since then, the club has registered pre-tax losses of £12 million in 2006, £34 million in 2007, £20 million in 2008 and £15 million in 2009. Unfortunately, we don’t yet have the 2010 accounts (Newcastle tend to publish these quite late), but the loss will certainly be even larger following relegation to the Championship.

Although operating profit, defined as EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), was positive for many years, it has been steadily declining and actually turned into an £8 million loss in 2009, due to the lack of revenue growth and the explosion in the wages. It is obvious that the club has been living beyond its means, which has been exacerbated by the rise in non-cash expenses, mainly player amortisation, and a raft of exceptional items. Once these are taken into consideration, the 2010 loss rises to £38 million, though this has been partially compensated by £23 million of profit on player sales, mainly James Milner, Shay Given and Charles N’Zogbia.

Profit from activity in the transfer market has been an important driver of Newcastle’s financial performance, so that the very high loss of £34 million in 2007 was mostly due to the £2 million loss on player sales that year, primarily arising from Jean-Alain Boumsong’s move to Juventus.

"Not just Andy Carroll's landlord"

Actually, the 2007 loss would have been even higher without a positive contribution from exceptional items. These included the usual substantial payments for changes in management £1 million plus £2 million compensation to directors for the loss of office and £3 million of costs relating to an aborted financing project and takeover bids that had to be written-off, but were mitigated by £7 million of compensation received following Michael Owen’s injury at the 2006 World Cup.

By far the largest reason for these exceptional charges is the severance payments made to departing managers, which amount to a staggering £17 million over the last five years, including £5.3 million to Kevin Keegan, £4.6 million to Sam Allardyce and his team, £3.2 million to Graeme Souness and £1.1 million to Glenn Roeder. It may be a nerve-wracking experience managing Newcastle, but it’s also a lucrative one. Rumour has it that Big Sam bought a villa in Spain with his pay-off, naming it “Casa St James”. In fact, give the regularity of these payments, it is difficult to argue that they are exceptional in any way, shape or form.

So how does a club go from making a small profit in 2005 to a large loss in 2009, especially in a period when the money from television has significantly increased? The step graph above clearly shows that Newcastle’s TV money has indeed increased in that period by £10 million, but all of that has been wiped out by falls in both match day income of £6 million and commercial revenue of £4 million, meaning no revenue growth at all. Despite that, player costs have shot up: wages by £21 million and player amortisation £6 million. The deficit has been mitigated to some extent by lower interest charges £4 million and higher profit from player sales £10 million.

At this point, I should emphasise that these figures relate to Newcastle United Limited, but the loss is even larger in the club’s parent company, St James Holdings Limited. This was £23 million in 2009 with the only substantial difference being £7 million amortisation on the goodwill arising from the takeover. The divergence was larger in the 2008 accounts, resulting in a £34 million loss in St James Holdings Limited, but that is only because that year’s accounts covered the period since the holding company’s incorporation, which was 13 months.

Even though Newcastle’s revenue has not grown over the last few years, it was still the seventh highest in the Premier League in the 2008/09 season at £86 million, though the gap has widened since then with Manchester City and Tottenham increasing their revenue to £125 million and £113 million respectively. It was already a long way behind the so-called Sky Four with Manchester United generating more than three times as much revenue at £279 million, followed by Arsenal £224 million, Chelsea £206 million and Liverpool £185 million.

It is perhaps surprising then that Newcastle still managed to feature in Deloitte’s last Money League, which ranks the top twenty football clubs in Europe by turnover, albeit in 20th position, especially as they are the only club in the list that did not compete in European competition. That said, Newcastle have featured in every single edition of the Money League since its inception in 1997, though they will slip out of the rankings next year, due to their (brief) sojourn in the Championship. Of course, to become a permanent fixture in these rankings, Newcastle will have to step up to the next level and qualify for the Champions League, which is probably a bit unrealistic in the short-term.

Although the magnitude of the revenue could be higher, the revenue mix offers more encouragement, as it is reasonably well balanced: media 44%, match day 34% and commercial 23%. In other words, they are far less reliant on TV money than many other clubs in the Premier League, half a dozen of which collect more than 70% of their total turnover from Murdoch’s empire.

Having said that, the vast majority of Newcastle’s TV revenue of £38 million in 2008/09 did come from the Premier League central distribution, which worked out at £36 million. This money is allocated as follows: (a) domestic rights – 50% equal share, 25% facility fees based on number of times a team is broadcast live and 25% merit payment based on the final league position; (b) overseas rights – 100% equal share. So, even though Newcastle’s allocation was adversely impacted by finishing 18th, this was mitigated by the club being shown live 20 times, the third highest in the division, demonstrating its enduring box office appeal.

Clearly, the TV allocation in the Championship in 2009/10 was much lower at just over £2 million. Although the impact of relegation was partly cushioned by the £12 million parachute payment, this still meant a drop in media revenue of around £23 million. Conversely, in 2010/11 Newcastle will again benefit from the Premier League’s riches, more so, in fact, as the new three-year deal kicked-off this season. Thanks to a healthy increase in overseas rights, this will be worth considerably more and it is anticipated that teams will receive at least £40 million. The last time that the Premier League deal was increased was in 2007/08, when Newcastle’s media revenue rose from £26 million to £41 million, so the importance of growth in this revenue stream is readily apparent.

Of course, like many other clubs, Newcastle’s TV revenue pales in comparison to the Sky Four, who have boosted their income with Champions League qualification. This was worth an average of £30 million for the four English clubs last year, not including additional gate receipts or uplifts in sponsorship agreements. To place this into context, in 2003/04, the year after Newcastle last reached the Champions League, their total revenue was only £2 million lower than Liverpool’s, but the clubs are now separated by almost £100 million.

Where Newcastle do score very highly is in gate receipts, thanks to their impressively large and loyal support. Although this has fallen from £35 million in 2005 to £29 million in 2009, this was unbelievably still the tenth highest of the Money League clubs, superior to Milan, Inter, Lyon and Borussia Dortmund among others.

Part of the decrease was due to the lack of European competition, which boosted revenue in 2005 and 2008 thanks to 6-7 home matches in the UEFA Cup, but average attendances have also declined, falling from 51,800 in 2005 to 48,800 in 2009. Despite season ticket prices being cut by an average 9% in the Championship, attendances unsurprisingly fell further to 43,400, but that was still the fourth highest in England, ahead of Liverpool, Chelsea and, yes, Sunderland.

After its redevelopment, St James’ Park is the third largest club stadium in England, only behind Old Trafford and the Emirates, with a capacity of 52,400. While it is true that Newcastle struggle to fill the ground, their crowd figures are still pretty remarkable, especially in the midst of an economic recession which has hit the north-east of England particularly hard. Indeed, the average attendance is up to 46,000 so far this season, which is only surpassed by Manchester United, Arsenal and Manchester City. In terms of the fan base, this is undeniably a big club.

Given that reputation, the club’s commercial revenue of £19 million might be considered a touch disappointing, especially as it dropped by £7 million in 2009, though much of this was because of the decision to outsource the club’s catering operations and some might be due to fans boycotting the club’s merchandise as a protest against the unpopular owner. In fact, commercial income might fall even more, as the four-year extension to the shirt sponsorship deal with Northern Rock is now only worth £2.5 million a year, only about half of the previous agreement of £4.8 million. Even this is not guaranteed, but depends on Newcastle remaining in the Premier League.

"What have they done to deserve this?"

This was one of only two Premier League shirt sponsorship contracts to decrease this season (Sunderland was the other one), but in fairness Newcastle were caught between a (Northern) Rock and a hard place and the deal is still the tenth most lucrative in the league, albeit miles less than Manchester United and Liverpool, who both receive £20 million per annum. At least, cash from this extension is not front-loaded, as was the money from the previous deal, which was reportedly used to fund Michael Owen’s transfer.

There is a new kit deal with Puma, who have replaced long-standing partner Adidas, which runs two years until 2012, though no financial details have been disclosed. At least this means that the ludicrous custard yellow away kit can be jettisoned.

It is still possible that the thorny issue of stadium naming rights will be raised again, though this is a tricky thing to get right, unless a club moves to a new ground where there is no history or tradition. That said, even Ashley’s fierce rival, local businessman Barry Moat, who unsuccessfully tried to take over the club, has admitted that he would look at naming rights in order to bridge the financial gap with wealthier clubs.

All in all, there’s room for improvement in Newcastle’s revenue, but it’s really not too bad. However, the club’s expenses are shocking, especially the wage bill. In four years, wages increased by more than 40% from £50 million in 2005 to £71 million in 2009, while the revenue stagnated, producing an unsustainable wages to turnover ratio of 83%, way above UEFA’s recommended upper limit of 70%. Only three Premier League clubs (Manchester City, Blackburn Rovers and Wigan Athletic) had a worse ratio in 2008/09.

Furthermore, in the year that Newcastle were relegated, they had the sixth highest wage bill in the league. Invariably, the level of wages bears a close correlation to success on the pitch, so it’s fair to say that Newcastle have massively under-performed. Put another way, their wage bill was more than twice that of the clubs they were battling for relegation.

Since dropping into the Championship, the club has significantly reduced its payroll, as many high earners have departed, including Owen, Mark Viduka, Obafemi Martins, Damien Duff, Geremi, Nicky Butt and Habib Baye, but many of the squad that was relegated have remained. As Llambias explained, “We didn’t fire sale. We purposefully kept a nucleus of the team that we felt could take us up.” This was an expensive gamble, but one that worked out in this instance.

In a way, Newcastle’s rapid return was only to be expected, given that their lower wage bill was still the highest in the league with Llambias admitting that the wages were “down to an acceptable level in the Premiership, but not in the Championship.” The cut might have been deeper if the club had inserted relegation clauses into the players’ contracts, but apparently the previous owners did not consider this a possibility. Nevertheless, it has been estimated that some £25 million was chopped off the wage bill, reducing it to around £45 million. Some other large contracts are apparently coming to an end next summer, so there will be an opportunity to further address the wages at that point, either by selling those players or offering them reduced terms.

There has also been a steep increase in player amortisation, namely the annual expense of writing down the purchase price of new players, which has doubled since 2005, rising from £10 million to £20million, though it is still on the low side compared to clubs known for being big spenders in the transfer market, e.g. Manchester City £71 million, Chelsea £49 million.

The concept of amortisation confuses many people, but it is simply how accountants handle player transfers. Instead of booking 100% of the player’s transfer price as a cost in the year of purchase, accountants treat players as assets, so the cost is capitalised and written-down (amortised) over the length of his contract. At the end of the contract, the player is considered to have no value, because he can then leave the club on a free transfer.

It’s probably easier to understand with a real world example. Let’s take Fabrizio Coloccini, who was bought for £10 million in 2008 on a five-year contract, meaning that the annual amortisation is £2 million. After two years his net book value in the accounts is £6 million (the original cost of £10 million less two years amortisation at £2 million per annum).

The increase in amortisation therefore suggests that they have spent big in the transfer market and that was indeed the case – right up until Mike Ashley arrived. In fact, most of the rise occurred back in 2006, before the new owner’s era, when the club also wrote-off substantial sums in impairment of player values.

Details of transfer activity over the last decade show the changing approach quite clearly. In the six years since the turn of the millennium Newcastle had net spend of £82 million, but in the last four years there has been a surplus of £18 million. Even when the new board sanctioned higher spending of £30 million in 2008/09, this was matched by sales of £32 million. That is an almost perfect example of balancing the books, whereby the manager has to sell before he can buy.

This cautious, but sensible, approach is epitomised by the first risk listed in the club’s annual report, “the acquisition of players and their related costs are one of the most significant and high profile risks facing the Group.” In fact, only three Premier League clubs spent less on bringing in new players than Newcastle this summer: Everton, Blackburn Rovers and Blackpool.

In spite of this, the club’s previous excesses have resulted in significant debt of £282 million, though only £150 million is held in the books of the football club with the remaining £132 million held in the holding company. The vast majority of this debt represents loans from Mike Ashley of £243 million, but there is also a bank overdraft of £36 million, which is a significant increase on the prior year balance of £1 million. Since the 2009 year-end, Ashley advanced a further £25.5 million to keep the club ticking over in the Championship, so his total investment in the club now stands at £268 million, represented by £132 million to buy the club, £70 million to repay loans and £66 million working capital.

Because most of the loans are from the owner, instead of banks, some commentators have argued that the club is effectively debt-free, though it should be noted that Ashley’s loans are now repayable on demand, whereas they were previously only repayable on demand in the event of a change of control (ownership). That said, it is clear that it is better for the football club to borrow money from the owner, as these loans are unsecured, which means that Ashley has no guarantee of repayment, and non-interest bearing. This has been important to the club’s finances, as the net interest payable has been reduced by £5 million a year.

More to the point, Ashley’s loans have been critical to the club’s survival, as it is far from clear that they would have managed to secure refinancing from the debt market. For example, Barclays Bank has insisted on securing its lending on assets and cash from transfer fees, while the last loan obtained by the previous regime under chairman Freddy Shepherd was at the prohibitively expensive interest rate of 11.72%.

In fact, it is fair to say that the previous ownership had mortgaged the club to the hilt, securing loans on virtually all the club’s assets (training ground) and future income streams (TV, sponsorship), though they would argue that this was used to fund the stadium development. Whatever the reasons, when Ashley bought the club, the holders of the loan notes invoked a change of control clause, forcing the new owner to immediately repay the £45 million outstanding, as opposed to the annual installments until 2016 that he had anticipated.

Despite his crass behaviour, there is no doubt that Mike Ashley has put his hand in his pocket to keep the club going. The unpalatable truth is that Newcastle United are heavily reliant on the support of their charmless owner. In the last two years, he has put in £111 million of new loans, initially to repay £70 million of expensive bank loans, but also providing £41 million of working capital on top of that (plus the £25.5 million subsequent to the books closing). Looking at the 2009 cash flow statement, his backing was required to help fund a £24 million loss from operating activities plus £17 million of net spend on new players, many of which were signed in previous periods, though most of the shortfall was financed by the increase in the overdraft.

The club’s deteriorating financial position is also evidenced by the balance sheet, which shows a swing from net assets of £17 million in 2005 to net liabilities of £52 million in 2009, though the players’ value in the accounts is under-stated compared to the price that they would receive in the market.

In contrast to Ashley, the former owners did very nicely out of their investment in Newcastle United, thank you very much. In fact, they absolutely coined it with the Halls (Sir John and Douglas) receiving a total of £95 million over the years, while the Shepherds (Freddy and Bruce) had to make do with £55 million. The Halls’ money comprised £55 million from the sale to Ashley, £20 million from previous share sales (to NTL and the club itself), £15 million from dividends and £5 million in salary payments, while the Shepherds’ money came from £38 million Ashley sale, £7 million dividends and £5 million salaries.

"Another fine mess he's got into"

And what was the result of these staggering payments? After years of rank bad management, they left the club in an appalling mess: a £30 million loss; £70 million of debt plus £27 million owing transfer fees; extremely limited borrowing capacity, as all assets and income streams had already been used to secure loans; and a bloated wage bill of aging mercenaries on generous long-term contracts.

They also left us the indelible memory of Douglas Hall and Freddy Shepherd being caught by a News of the World sting, when they were recorded in a seedy Spanish bar, laughing about the Toon Army’s gullibility in buying replica shirts and calling Geordie women “dogs”. After this scandal, the gruesome twosome briefly resigned, only to return to the board less than a year later. Somehow, they managed to survive by spouting a lot of nonsense about “fighting for the Geordie nation” and appeasing the fans by making a marquee signing from time to time.

Incoming chairman Chris Mort criticised the old board, “If they had not been successful in refinancing the club by the end of the year, it would have folded like a pack of cards.” Admittedly, he had a vested interest, but his view was endorsed by Vinay Bedi from stockbrokers Brewin Dolphin, “Ashley bought a club that was financially going nowhere with debts increasing as player transfers built up. It was a difficult situation – it was hard to see how the club could be turned round quickly without a huge injection of cash.”

"Newcastle v Sunderland - Cheick Mate"

To be fair to Ashley, that is exactly what he has done. Furthermore, the club’s accounts have only been signed off by the auditors on the basis of assurances from Ashley that he will continue to finance operations in the future. The man himself has said that he is “prepared to bankroll Newcastle up to the tune of £20 million per year, but no more.” The question is for how long he can afford to do this, as his wealth is linked to the fortunes of his company Sports Direct, which has seen fluctuations in its share price and is also the subject of an ongoing investigation by the Office of Fair Trading. Nevertheless, even though his wealth halved in the 2009 Sunday Times Rich List, he is still estimated to be worth £700 million.

Of course, the more fundamental question is whether Ashley will sell the club. He’s had plenty of attempts already, lowering his price each time he puts the club in the shop window, starting at an utterly absurd £400 million, before rapidly changing down through the gears until he reached the most recent price of £80 million, though it is not entirely clear whether or not that includes repayment of the loans made on top of the original purchase price.

It is difficult to understand his intentions. In the past, he’s made all the right noises about selling the club, but when Barry Moat appeared to be edging close to his asking price, he suddenly cancelled the sale. Giving the new manager a five-year contract does not seem to be the act of an owner that is keen to sell, but Ashley is a bewildering figure in many ways.

For the right price, Newcastle United would surely attract a serious bidder. It’s the only club in one of England’s largest football cities, which has a very large following. Not only that, but it is also playing in the richest league in the world with the most lucrative TV deal and has numerous commercial opportunities. More cynically, another attraction to overseas buyers is the lax regulations on takeovers in the Premier League.

"It's really not funny"

Financially, the figures will get worse before they get better, and Newcastle have estimated an operating loss of £32.5 million for the Championship season in 2009/10. However, the club is aiming for self-sufficiency now that it is back in the Premier League, and this should be feasible, especially with the new TV deal and the reduction in wages after the clear out of so many high earners after relegation. My own estimate is for a £5 million profit, which assumes £45 million TV revenue, 10% reduction in match day income compared to the last time in Premier League, commercial revenue reduced by £2 million for the lower sponsorship deal, a £50 million wage bill and £15 million profit on player sales (Sebastien Bassong, Obafemi Martins and Damien Duff).

The tragedy for Mike Ashley is that he could so easily have been a hero to the Newcastle faithful, having sunk so much of his own money into the club, but as Freddy Shepherd acidly observed, “Anybody can buy a football club, not everybody can run one.” Leaving aside the slightly unreliable provenance of the quote, especially as Ashley has had to fix the financial mess that he inherited from his predecessors, the man does have a point. As Ashley himself has admitted, “I tried my best, but I accept that my best was woefully short.” Even after Newcastle’s victory over Liverpool at the weekend, it’s difficult to believe that many of their fans would disagree with him.

I like your posts,very enlightening.my question is about arsenal.A lot is talked about wenger's prudence in the transfer market. however I would like to hear your views about the pros/cons of his prudence,that's the economic implications on the revenue of AFC.I get the feeling that prudence(stubboness) is not always the most profitable option

Mr Ramble great article as always.. your analysis has always intrigued me (being a financial advisor myself with Deloitte). I was wondering if you could look in more detail into Bayern Munich's financial results in the year gone by. Specifically i am looking for answers:1) How good was 2010 financially and from where will the future growth come from?2) How is Bayern able to offer Lham, Ribery and Shweini (presuming Robben is next) 10+ million salary?3) What is the current status of Bayern's stadium debt?And Please keep up the good workSheshank

One of the best articles I have read about Newcastle United recently and very thought provoking. I detest the FCB but I found myself beginning to understand Ashley's approach to the finances, and appreciate his personal input, and I was almost beginning to like him at one stage. If we finish in the top six and have a good run in the FA Cup this season then the fans might forgive Ashley for cruelly ditching Chris Hughton and be optimistic about the future.

This analysis reveals nothing that Newcastle fans already knew about the disgraceful way John Hall and Shepherd raped our club.Mike Ashley only needed to speak to the fans truthfully and he would of been ok.It has been his own fault that he has appointed incompetent people to run his club.Redemption could still be his if only he would come out and speak to the fans,this is my hope.Jarra NUFC fan.

Your analysis and comments are spot on. It has been clear for quite a while that the real damage to our club was done in the latter years of the Sheppard era and you have nailed that really well.

Within my supporter network I have been a loan voice in supporting in principle what Ashley is trying to do in getting the transfer bill, the wages bill(not just players, but throughout the Club), and the transfer policy (i.e. young players with long term potential), on to a better long term footing. However the problem is that Ashley runs the Club in a similar manner to Sports Direct in terms of PR, basically it is "screw you I'll do things my way, take it or leave it!" This just about works with SD (but the City are not at all keen on his governance methods).

However a football club needs to be much more touchy feely as it a totally different community compared to people (such as his SD customers) who buy every thing on price. Wise up Mr Ashley, talk to us more and maybe we might start to understand you more and perhaps (just) start to like you a little bit!

As the fan of a Championship club, I'm not about to be over generous to the Magpies. They bought their way to promotion via the wage bill and a age to turnover ratio of 83% is horrendous, but this superb article does provide some grounds for optimism, as many of the commenters above concede.

The 43,000 fanbase of last season is undeniably impressive as is the emergence of the homegrown likes of Nile Ranger and Andy Carroll plus relatively low cost signings such as Mike Williamson last year and Dan Gosling & Sol Campbell this (although the latter appears all at sea).

But despite the clear potential to be a huge club, Newecastle fans do need to realise that this will taek a long time and better stewardship than Ashley is providing to enact - thus, it was encouraging to witness their reaction to Chris Hughton's bizarre jettisoning.

Enjoyable references to Dennis Wise's patronage of the taxis outside Scribes West and the leech like previous owners, as well as Casa St. James's!

Kieron,All the best to you and your family for the coming holidays. I hope you will enjoy the Swiss snow. There is no point trying to make it to England as you may never be able to return!!!Great articles on Porto and Newcastle.Hope to see you again in 2011.am

I've been taking a break from the blog, but some answers to your questions on Bayern:

1) I've had a quick look at Bayern's headline figures, but not performed my usual detailed review.

2009/10 is another good year financially, with a profit reported for something like the 18th year in a row. Revenue up 12% to €323m (Bayern quote €350m, but that includes €27m profit on player sales), which is impressive.

Staff costs rose just over 18% from €139m to €165m, giving a wages to turnover ratio of 51% (up from 48%). This is not too bad, especially compared to most English clubs (only 2 are better - Man Utd & Arsenal), but is possibly a little higher than German clubs would like to see. I don't see this as anything to worry about, though it wouldn't surprise me if Bayern addressed this by the sale of one of their high earners like Ribery or Robben. Having said that, the magnitude of the rise is quite surprising, given that director of sport, Christian Nerlinger, had spoken of trying to reduce the wage bill. The other potential factor is bonus payments, which might have inflated the wage bill after Bayern's run to the Champions League final.

2) I would refer you to an old article of mine looking at Bayern's business model, especially the comments on their commercial success:

3) At the AGM club chairman Karl-Heinz Rummenigge said that €176m of the stadium debt had already been paid off. Last year this figure was €163m, suggesting that Bayern paid off €13m this year, which is pretty good going.

As a Charlton fan I'd be pleased if anyone has any insights into Tony Jiminez, who appears to be one of the key players in the buyout of the club yesterday. I would like to know what, with hindsight, you make of the decision to bring him in, what he did, and didnt do, and why he left again. Also how rich is he? I do not believe he is rich enough to take a stake in a club. It seems to me he is a contacts man, and that he may be fronting for the real investors. If that's so we want to know who the real investors are, of course. Any help from you Mr Swiss Rambler or any contributors would be most gratefully received

Swiss Rambler, I am a great fan of your blog and very much appreciate the manner in which you present the facts and figures in a very easy to understand format.

I would be most grateful if you could write a blog/article on the accounts of Leeds United if possible- with a specifc focus on who actually owns the club! rumour has it that Mr Bates is just a front man....

Apologies that this isn't a comment about this post, but I can't find an email address for you. My questions are how do clubs account for player loans, and is there a way to see how much of a business it is becoming for them? Is it lumped into the transfer numbers or is there a separate line item, and if so does it show up in the P&L anywhere where it can be seen?

You're probably the fifth person this week that has asked me to look at Leeds United. I might well do at some stage, but, to be frank, I'm not overly optimistic at discovering the ultimate owners, as this would require a far more thorough forensic accounting exercise than I could spare.

Great article.My resentment of Mr Ashley has soften somewhat.Financially we have been in a right mess and still are.However,there does seem to be some green shoots.I do wish Ashley and his cohorts would communicate more with the fans!!.HWTL

A great read. The biggest problem between Mike Ashley and the fans has been the total lack of communication from the club. I believe the fans will show alot more consideration towards MA if the club had highlighted the financial problems sooner and come out and express their ambitions for the future. Hopefully, its onwards and upwards from now on

Great Article! You've done a fantastic job in getting all the facts right and putting this massive jig-saw puzzle together. I appreciate what Mr Ashley is trying to do in balancing the books and spending wisely. Although I can't understand his pathetic appointments and rash sackings that cost huge amounts of money. He has the right idea but acts in the worst possible ways. A very bizzare fat millionaire. I sincerely hope for the good of my club that he's after stability and won't be the drama queen yet again!

PS. Much respect to Chris Hughton for the brilliant job he did whilst here. His appointment although surprised me he earned himself a new contract. Unfortunately for Chris Ashly swung the axe.

This is by far the best and most accurate account of Newcastle United's past and present.Ashley has not taken £95 million out of our club (John Hall and Douglas slime ball) or £55 million by our last chairman Freddy Shepherd).Ashley should have been honest with the supporters and staff from the off, he should have spelt it out along with his plan for the club.Huge debt, has been players on huge wages, no youth development and no longterm plan to build a team capable of challenging the top 4/5 in the medium future which is affordable and cost effective.I hope Ashley who is doing a wonderful job in many ways sits down in the summer and writes an honest and accurate statement of his actions so far, warts and all and also lay his plan on the table so the fans can appreciate what he is attempting to do.We can all see he is turning this club around and I for one am grateful for it.Personally I would like to see Ashley team up with a supporters organisation like NUST and work in tandem for the club but absolutely run in a business like fashion, no more inflated ambitions.

Wonderful description of the situation and how it has become like this. THANK YOU for making this!!!

Overall I do have sympathy for Mike Ashley although he's made lots of mistakes. I truly believe we are finally going in the right direction.

Another thing is the blessing in disguise of the relegation. Many of the Premier League clubs are in a horrible economic situation close to how Newcastle were and they will be hit by that at some point.

When that happens we have a huge advantage in that we already went through the restructuring.

That is unless they are all taken over by Arab and Asian billionaires though, which to be fair is not that unrealistic.

But even in that case it seems the club has now REALLY become a club! With a massive team spirit, which is impossible to buy. Long may it continue.

Having supported Newcastle for about 15 years now, there's been times this season where I've been as proud of the team and the players wearing the shirt as at any other time.

swissrambler,A very informative read about NUFC, I must say that MA's decision making process seems to be entirely at will however there does seem to be some element of a decent business strategy somewhere! What is your view on the £35m NUFC have just received for AC, in your view does it significantly alter the prospects for this great club? Thanks again for the analysis- some effort!

You used that document to illustrate our annual cashflow. Yet why is there mention of EBITDA such as Player Amortisation, impairment of player values and depreciation regardless. These are strictly non cash flow expenses and should NEVER be taken into account on a cash flow account. They are for the stock value of such entities. If a players value declined whether it be his contract shortening or performance, this will not effect expenditure. Thats a load of utter nonesense and I knew it would be something like this which would attempt to fool the public.

Take into consideration what I have said and how it effects EACH year.

I will use the first year we made a loss, 2006.Turnover 83.1mExpenses 70.1m

Now you chip away with "Exceptional items, Amortisation, player values, Depreciation" which is3.2M, 16.2M, 1.4, 3.6M WHICH IS A MASSIVE 24.4M

As a result, the table has the operating profit as -11.4. Now, remove Ebitda which is NONE CASH FLOW you have a PROFIT of 13m !!!!

Plus an extra 5.2m for player sales you now have 18.2m. Rinse and report for subsequent years !!!!!

Maybe if you used less exclamation marks, then you would be able to read the analysis a little better.

1. I did not use that document to illustrate Newcastle's cash flow, but their profit and losses. The clue is in the title of the graph, "Newcastle United - Profit Trend."

2. I have deliberately separated cash and non-cash expenses, such as amortisation and depreciation, so people can easily see the impact. The non-cash flow expenses are included in the section marked, non-cash flow expenses. Not very difficult to miss, I would have thought.

3. I even devoted an entire paragraph to discussing EBITDA, but you seem to have managed to miss that as well.

4. Your dramatic analysis of the 2006 results, which produces a "profit" of £13m, is not exactly news, as this is exactly the same as the figure I highlighted as EBITDA for that year (in bold, shaded in green). The only thing surprising about this "revelation" is that in your mind it is somehow worthy of four exclamation marks.

5. For someone who is so keen to analyse the club's cash flow, please allow me to point you in the direction of the table entitled "Newcastle United - Cash Flow", which would seem to be more appropriate for the task in hand.

I am grateful to you for one thing however, which is that this is the best attempt I have ever seen to prove the old saying, "A little knowledge is a dangerous thing."

What a pathetic, small poisonous man you are. You address me instead of my comments. You go after my character, not my comments or the facts. You misleading whiny little bitch. If you want to address me, then do it MAN TO MAN. The strawberry pub, you know where its at. Meet me there, then you will see what and whom you are dealing with now. You think I am a random poster, with little time but what to spend on your shitty little Ashley sh*t covered d**k post here ?

Ashley IS making money from this club whilst asset stripping it to cover his initial exposure. I KNOW THIS. Next is Tiote, in the summer to Chelsea for 20m. Then Enrique, 15m.

The only thing that matters is the annual cash flow. You may have mentioned EBITDA elsewhere, but I made my post news to other message boards. Seems I have gained a large following already. So not everyone has the time/lack of life to read your entire document. What people want to know now is the turnover which you illustrate badly you misleading w***er. You know exactly just what you are doing. This club IS making money and it is being absorbed by St James Holdings.

What else is their, the rest is speculation. You made this document to sympathise with a man who is asset stripping this club until the day he walks away. You disgust me. You sit behind that pc there, safe in the knowledge only your wife if indeed you have one knows how pathetic you are.

1. IT IS MISLEADING. Do NOT attempt to dismiss this you trashy little sh**e! The vast majority of people do not understand such tables and will surmise the totals.

2. NO YOU DIDNT. To genuinely "seperate" them you would not have negated the speculative impact they had on ANNUAL CASH FLOW !! You lying bag of w**k. I hope people see you for what you are. I couldnt give a bell for what they see me as. YOU are misleading them, you are a Mike Ashley sympathiser who is serving this crap to placate fans.

3. How dare you even use EBITDA. Nobody for certain can predict a players valuation, until a club comes in. That is the con here. You say you addressed it in a further paragraph, but what is the point if you have already illustrated it in the highlight of this site, which is the 5 year annual cash flow. After all, that is what the majority of fans will see.

4. You patronise me, yet my comments exposed your intent. Spineless tw*t, you know what you're doing and in typical fashion you go after the poster and not the post becuase you 100% know what I said is true. I could dismantle your entire site for you because I know it will also contain pseudo bull s**t with the intent on gaining sympathy for that fat pig of a "man". He lost MORE than he spent in January in a Casino even though we were promised a 10m warchest.

5. You call that a cash flow ? Wheres the turnover ? Wheres the detailed expenditure ? Again it is a vehicle to delivery an agenda, to illustrate Mike Ashley as a saviour. The real cash flow is the one I lambasted. So what of the defense ? The CLUB IS breaking EVEN. The club IS generating a PROFIT ! Where is our player money going ? Why did Ashleys puppet state that in 3 years time we MAY be free of this shackles of financial melt down ? It is PURE LIES, again to placate fans to ease the pain of when they eventually sell the clubs assets and to prevent EXPECTATION.

You actually pass your sh**e off like this, you have ZERO interest in the club. Hughton was sacked before January for a reason. He would have been an uncontrollable entity given the intention to sell ANY of the assets. We had NO intention of purchasing players. Nzogbia from Wigan, Whelan. Come on, we may as well have put 35m on the table for Cesc Fab.

I don't really know where to start, beyond reminding you of the old saying that there is none so blind as he who won't see.

You don't appear to understand the difference between a profit & loss account and a cash flow statement, nor do you grasp what EBITDA is. The cash flow statement that you dismiss is a summary of the one in the club's accounts - you know, the financial statements that are signed-off by the auditors, but in your world they're probably part of the conspiracy too.

However, in the spirit of compromise, I'll give you a free accounting lesson. The turnover and detailed expenditure are included in the first line of the cash flow statement, "Operating Activities".

There can be many ways of interpreting a club's accounts, I'll grant you that, which is why I go into so much detail, but your assertion that Newcastle are making a profit is a strange one. Let's go with your stream of consciousness for a moment and exclude the non-cash items like player amortisation, even though there's clearly a cost associated with buying players. Let's also deduct exceptional charges and, hey, while we're having fun interest payments. That leaves us revenue of £86m and expenses of £95m or an operating loss of £9m. Of course, this would be improved by the profit on player sales, but you don't seem to like that strategy.

You are right that Newcastle should be profitable in the Premier League, as indeed I wrote in my penultimate paragraph, but that balanced approach is probably too balanced for your paranoia. I am no Ashley apologist and have criticised his actions where I felt that was warranted, but also praised him where I felt that was deserved.

At no point did I address the question of your "character" in my previous response, though you have done a great job shining a light on it in your last comment with the abuse, threats, hypocrisy, etc. What I will admit to was pointing out your ignorance of matters financial. That is beyond dispute.

I'm a regular poster on the Nufc blog, I thank you doing this article and see that you have done it for various other clubs.

I appologise for the 'idiot' who posted on above, I'm afraid that there are a very small minority of fans that when presented with argument and counter argument resort to 'come and say that to my face'.

Please believe that the majority of us are decent intelligent people who have the ability to understand your blog, I'm not saying they're not questions for Ashley to answer, but his biggest problem is his woeful PR and inability to keep us the fans in the loop.

Once again please except my apologises for the above so called Newcastle fan.

Thanks for that. I rarely get such abusive comments, as I always endeavour to keep my posts balanced. In fact, I often review a club's finances at the request of some of the club's own fans, which was the case with Newcastle.

I didn't actually view this as a pro-Ashley post in any way, shape or form, though it did point out that he was not totally bad.

Funnily enough, two of my best mates when I was a student (many moons ago) were Geordies, when I played for the university football team. I was an old-fashioned target man, while they formed an uncompromising partnership in central defence.

Overlooking the comedy and ignorance of those anonymous comments, it's remarkable to read how the fear of financial meltdown has crept into the average supporter's consciousness. Not only do fans have to bear the burden of their team losing games and getting relegated but they also have to worry about their club losing money, paying wages and generating revenue. How we got into this position where raw sporting emotions got mixed up with the hard numbers in balance sheets is a curious phenomenon; it certainly gives the term "emotional investment" a new dimension.

I must admit that with no knowledge of accountancy I can't comment on the detail of the figures, but when many, perhaps the majority, of other clubs are being supported by wealthy owners, NUFC aspiring to break even, or turn a profit will surely result in the club underperforming in relation to others with a similar sized fan base. For this reason Ashley's effort should be directed to finding a buyer willing to make this commitment, and selling at a price that ensures this happens quickly. Both Manchester City and Sunderland have managed this in recent years so it shouldn't be that difficult.

Swiss, A wonderful piece - can I ask you to use your insight and understanding of what is good practice in the management of a football club to supplement the behind the scenes advice being given to Messrs Ashley and Llambias.What would your strategy be in order to achieve the following Year one 2010/11- Break even 2011/2012 Profitability to a point where one is able to build the team as a net buyer in team strengthening2012/13 Profitability/Team building - Determine a repayment schedule to pay Mr.Ashleys's loan and purchase price back with a reasonable premium (IRR 5% p.a.? given no-one buys a football club to make money other than the Halls and Shepherds)How do we get out of this hole swiss?

Thanks. Clearly, the £35m received for Carroll will make a difference. My guess is that the club expected to sell him at some stage, but not for that sort of profit. However, given Ashley's statements, I'm not sure whether this will mean a dramatic change in policy.

That anonymous commentator from 6 February is frighteningly repulsive and ignorant. Unfortunately there is a large number of NUFC supporters who believed the lies and propoganda of the odious John Hall and his cronies. What you may not realise, Swiss Ramble, is just how Hall was able to create a situation at Newcastle where he was able to do almost what he liked without criticism. Much of this information is still to be broadcast, but somehow he was able to coerce the local evening newspaper into being his mouthpiece and had massive influence over the local authority. Many recognise they were conned into believing the continuous stream of propoganda and deceit, and some, probably including your anonymous assailant, find this difficult to reconcile and so lash out with unrestrained fury at those that remind them of their gullibility and ignorance.This was a balanced and astute piece of journalism....I only wish it were published in our local morning newspaper (which has always endeavoured to remain impartial) for all to read and consider.

I'd like to point out to you that your intitial premise that Ashley did not undertake due diligence is wrong. Chris Mort, a Freshfields lawyer no less, stated on August 10th 2007 that normal due diligence was indeed undertaken. Unless people are suggesting that was a lie, this myth ought to be put to bed.

It's not actually my initial premise, but no matter. There are plenty of quotes suggesting that the due diligence was inadequate, not least by Ashley himself.

By the way, the fact that Mort is a Freshfields lawyer cuts no ice here. Lehman Brothers, Merrill Lynch and the Royal Bank of Scotland all had excellent reputations before they spectacularly collapsed or were bailed out.

Excellent piece. Following on from the "due diligence". Wasn't it the case that due diligence was done and several anomilies identified and brought the Ashley's attention. He chose to, I suppose "ignore" is the wrong word, but he instructed his lawyers to go ahead and buy the club anyway. Remember, at the time, this was a man who had just be handed a cheque for £1.9billion a few weeks before. His buy it no matter what attitude was, although to a lesser extent, evident when buying himself and mates a drink in the Blue Bamboo - "Ah get eveyone a drink". Cheers Mike.

With regard to the debt attached to St James Holding, it looks like this being reduced (from £138mill in 2008 to £132mill in 2009) does this mean ashley is getting is outlay for the club back over time?

Dear Swiss Rambler, many thanks for this post, i've come back to it many times to try and understand what is happening at the club.

I was wondering if you could you help with a question regarding the Sports Direct sponsorhip and logos at St James Park. Is it possible to ascertain from the accounts whether SD pays NUFC for this priveledge?

From the 2009 accounts

'During the current and prior year, advertising and promotional services were provided to companies associated with Mr MJW Ashley, the ultimate shareholder of the company's parent company, St James' Holdings limited. No consideration was paid or payable for these services and the cost associated with the services in the prior year was £42,250.'

From the 2010 accounts 'During the current and prior year, advertising and promotional services were provided to companies associated with Mr M J W Ashley, the ultimate shareholder of the company’s ultimate parent undertaking, MASH Holdings Limited. No consideration was paid or payable for these services.'

Does this mean that Ashley is allowing SD to advertise for free at SJP?

Your post presents the commercial / sponsorship revenue line over time and shows it decreasing, with the latest figure in 2010 being £15.4m.

Can we conclude from these statements and data that SJP is being used by SD as a free advertising platform? Does this make sense for Ashley? He is 100% owner of NUFC and so any losses, he covers himself. He is the majority shreholder in SD so is happy to have free advertising.

Another question that concerns me is whether the purchase by Ashley was a leveraged purchase, since the club seems to have gained £132m of debt out of nowhere which is held with the holding company and (just about) equals the money he spent on buying the club. In fact the Mike Ashley loan of £138m which appears out of nowhere in 2008 is the exact sum he paid in 2007. Odd coincidence, scandal or my lack of understanding?

It's not absolutely clear from the accounts, but the notes that you have quoted from the related transactions section would certainly suggest that that is the case.

However, the two main reasons for the reduction in commercial revenue are: 1. Outsourcing the catering operation, so the revenue is only the fee received from the contractor and not the full value of the catering. 2. The value of the Northern Rock sponsorship was reduced.

You're right that the value of the loan in St James Holdings Ltd is the same as the price paid for the club, but this in itself does not tell us how the loan was funded.

I really dont understand why a business which turns off escalators to save on electricity (as apparently occurred at SJP), which is desperate to boost commercial income to offset losses / afford higher wages at the same time doesn't charge for sponsorship. The implication is that Ashley is running NUFC mainly to serve the needs of SD as he is not doing everything feasible to boost NUFC income. Assuming that all advertising for SD is good for it (otherwise why on earth would he bother covering the place in SD branding?) then there is a return on any money SD pays to NUFC for using this space.

Could I ask you what you mean specifically by how the £138m loan in SJH Ltd 'was funded'?

The question is whether the £138m spent on purchasing NUFC shares in 2007 was lent to SJH Ltd by Ashley to buy NUFC and if this is the £138m showing on the accounts of the holding company in 2008? There is no sign of this money until 2008 so the only explanation i can think of is that this was like a leveraged buy-out, not an outright purchase as it has been presented in the press.

I dont really understand the relationship between NUFC and the holding company though and why with only £70m of debt to be paid off and £66m of working capital to be injected, an extra £138m is owed by the club.

Swiss,Thanks for this and the other Newcastle article you've done. They make very interesting reading for a lifelong (and geographically removed) fan like me.I wonder if you have any plans to do an update. It has been rather interesting at St James's Park recently...Respectfully yours, Ian

Praise for The Swiss Ramble

"Blogger of the Year 2013 - It’s testament to the effect that Kieron has had on the blogosphere that so many fans take his word as gospel. Putting to use his career in the world of finance, his insights into balance sheets and simple explanations of complex ideas appeal to the hardcore financial whizz and casual fan alike." - The Football Supporters' Federation